Are you only making the minimum monthly payments toward your debt? Let’s look at a couple of the Myths of the Minimum Payment that might motivate you to do at least a little bit more! We’ll discuss in the comments below.
Myth #1– You will never pay off your debt if you pay just the minimum monthly payment.
This used to be true. Credit card companies used to charge such low minimum monthly payments that the payment wouldn’t even cover the interest. None of the payment went to principal, so the credit card debt would continue to grow, even if nothing else was charged to the card. It’s called negative amortization and it was bad news for consumers before 2003.
In 2003 legislation was passed requiring the minimum payment to cover fees and interest and allow some of the payment to go toward principal. If you have credit card debt, you will eventually pay of your debt off by making the minimum payment, but it will take years longer and cost you much more in interest.
Here’s a simple example:
$10,000 in credit card— 12% interest— 2% minimum payment (pretty much standard)
A– If you pay the minimum 2% of the balance (starts at $200/month, but goes down each month as the balance goes down), it will take 424 months (35 years) to pay off your debt of $10,000. You will pay over $15,000 in interest alone!
B– On the other hand, if you pay a fixed payment of $300/month, it will take you 44 months (under 4 years) to pay off your debt of $10,000. You will pay just over $3,000 in interest.
As a side note, if you take the starting minimum payment of $200 in example A, and keep that $200 as a fixed payment, you will get done in 6.5 years, which is still amazingly better than the bleak 35 years of minimum payments.
While the myth “You will never pay off your debt if you pay just the minimum monthly payment” is technically not true, it really depends on your interpretation of the word “never.” Sometimes “a long time” (like 35 years!) may as well be “never.”
If you haven’t run the numbers on your debts, play around with a credit card calculator to see the difference that paying more than the minimum payment can make. You might have to check an old statement to see what the minimum payment percentage is (or just use 2%). We can discuss details on your findings in the comments.
Are convinced that paying more than the minimum is a must? That leads us into myth number 2.
Myth #2– You can’t afford to pay more than the minimum payment.
Maybe your current budget allows only enough money for minimum payments, but that doesn’t mean you can’t afford more. Knowing that paying only the minimum due will likely cost you thousands in interest and take many years longer to pay off, you really can’t afford not to free up some money to increase your monthly payment.
Ideas to free up some money in the monthly budget to put toward debt:
- Get rid of cable
- Downgrade your phone plan (we get a refund each month for unused data)
- Cut the grocery budget (with these real food meal plans you’ll spend $350/month
- Stop eating out
- Pack your lunch
- Ask about having your bills lowered
- Dress for the weather and adjust the thermostat
- Skip the morning coffee and afternoon Coke (drink water instead)
- Sell your car and buy a used one
The list could go on and on. Get creative. Make sacrifices.
“Finding” money in your monthly budget by reducing expenses is a gift that keeps on giving. Sure, you can find something to sell on ebay and get a one-time $60, but if you pull the plug on cable you will have an extra $60 (likely more) every month.
If you still have plumbing problems (i.e. you are spending more than you make) then your debt is still growing. You will have to free up enough in the budget to cover your expenses before you can find extra to increase your monthly payment to creditors.
If you are stumped about where to start and how to reduce your expenses, check out Frugal Fresh Start: A 28-day challenge to trim your expenses, build a budget & fix your finances. You’ll find practical, effective challenges that will help you reduce your normal expenses, organized in a way that’s motivating and makes sense!
Don’t let these myths or their debunking discourage you. Knowledge is power! Let it encourage you. You can do this!
It’s Your Turn!
- Do you routinely pay more than the minimum payment on your debt?
- What ways have you been able to pay more than the minimum payment?
- Have you run the numbers on your debts to see the difference paying extra would make?